The Market determines all

What is the worth of being right most of the time if in the end you end up loosing money? Probably there is no worth whatsoever. That´s why it is important to be right at the right time about things of importance.

You can be right on every one of the first six factors of the CANSLIM method; however, if you are wrong about the direction of the broad general market […] you will loose money.

William O`Neil

That´s why it is so important being able to determine whether you are in a bull or a bear market, in which stage the market is in and what the future prospects are. As expected this seems to be no easy endeavor though and the ability to pick the market top seems like an art rather than a science.

The best way to do this is to “follow and understand every day what the general market is doing”. Reversals in the market can occur any day and important signals may occur any time. What are volume and price doing? Is the top of a market reached? But how can a market top be detected? Firstly, a rule of thumb might to be considered. If you have lost money on your last five trades, there is a high likelihood that you are in a bear market. Besides that, there are many indicators and all are to considered as little peaces of the big puzzle.

One of these peaces may be the fact that during an uptrend volume on a given day may increase considerably over the prior days volume with price averages remaining stagnant. This is a sign of liquidation near the market top and usually is followed by four days of sell off. After this time, the market generally will try to rally which can fail in several ways. Decreased volume, poor net price progress or a market recovery constituting less than 50% of the initial drop might constitute these failures. In case of a situation like this a market top seems likely.

Furthermore, an important indicator to watch is the general interest rate. Even though this seems highly simplistic O´Neil argues there to be a high likelihood of a coming recession in cases of three consecutive raises of the interest rate. As a further rule of thumbs stocks tend to behave in different ways throughout the day in bear and bull markets. While stocks during bear markets often open up strongly and give away profits until the close of the day, stocks likely open down in bear markets and come back during the trading day.  Especially important to observe are leading stocks of a market. How do the leaders behave? Are strong or weak stocks the leaders? All this allows for a general perception of market strength. Additionally, it may be advisable to listen to investment advisors – but in a special way. The cumulative percentage of professionals being bearish versus bullish is to be respected. Most investment advisors are bearish near market bottoms and bullish near market tops and in this way manage to be wrong most of the time.

Of the CANSLIM method determining the position and movement of the market definitely seems like the most difficult but most important indicator to me and experience probably is indispensable. Thus, as indicated already, daily studies of the market seem to be necessary in order to master this key of successfully investing.

Best,

Nils

 

Institutional Sponsorship and Procrastination

Hi there,

Institutional Sponsorship (I) and Market (M) are the last missing components of the CANSLIM framework. Since my scheduling in the last weeks has been of limited value and the next entry about the Market (M) will be extensive, I will only cover Institutional Sponsorship (I) in this text.

But first of all I have to reflect on the actual difficulty of following through on the goals I set myself for this year. The plan was to read everything about investment that I can get my hands on and write about and thus internalize it. It has been one and a half months so far and the first book has not even been finished yet. I´ve come to realize how difficult it is and how much discipline it requires to actually follow through on the great goals set at the beginning of the year. How I imagined myself being the next big guy knowing everything about the topic investing daily 25 hours studying it. The fact that I´m in a new country, living in a hostel does not make the whole thing easier but should not be accepted as an excuse. Time for the important things has to be set aside and that is what I will follow through on in the next weeks.

But lets talk about what we all waited for – Institutional Sponsorship YEAHHHH

Institutional Sponsorship (I)

The reason that Institutional Sponsorship is included in the framework seems to be a truly humble one. There are thousands of investors that specialize in investing in promising opportunities. The sheer amount of investment firms makes it rather unlikely that none of these  highly sophisticated firms has analyzed the stock you are interested in. If stock is owned by  no institutional investor with a great performance record then the company actually might be not as promising as your own analysis has indicated. O´Neil calls this institutional sponsorship. An institutional sponsor could be a mutual fund, corporate pension fund, insurance company, investment counselor or hedge fund. However not all institutional sponsorship is to be regarded as of equal worth. The savvy investors should be separated from the less savvy ones. In order to evaluate the quality of sponsorship performance figures of the last 3-5 years are helpful tools to consult. Additionally techniques and investment styles of investment firms might enable to predict about average skill in management.

Best,

Nils